I know a lot of people groan at quarterly taxes. It's bad enough to have to pay taxes once a year--but four times? Here are the advantages:

It forces you to stay somewhat up to date on your savings.

It gives you a warning every few months if you're living beyond your means: If you don't have enough money to pay quarterlies, you may be overspending.

It gives you a concrete warning that you're underearning: Can't pay quarterlies because you're not earning enough? It can be a good kick in the butt to get you earning so you can make up for it next quarter.

It relieves you of the insanity of trying to scrape together thousands of dollars in April if you haven't saved for it before then.

The other reason is you get penalized if you don't do it. This year, the penalty is 5% of your estimated taxes due, if you earn more than $1,000 from your business this year. So it's really worth it. I don't know about you, but I don't have extra money to give the IRS. Do you?

So how do you set them up? The easy answer is that you hire an accountant and he or she figures it out for you and sends you invoices to pay on April 15, June 15, Sept. 15 and Jan. 15 (or thereabouts).

Set it yourself

Go to the IRS Web site and download the 1040ES form. It includes a worksheet that will help you figure out how much you expect to earn to you can determine how much should be included in each payment, and it includes payment vouchers you can fill out yourself and send.

Don't leave it to chance

Most important, don't assume you'll remember to pay. Write it on your calendar and pin the vouchers to a bulletin board or someplace else you will see them regularly. I write it on my planner a few days before they're due so I don't have to get caught in the rush.

Monday, March 30, 2009

Ugh. Taxes. This year especially, when there's so much financial turmoil, the last thing many of us want to do is turn over any money to the IRS. But it's our civic duty, if we want potholes filled, teachers paid, or any other public service on which you may not realize you rely.

I'll be the first to admit it: I don't have the money to pay all my taxes on time this year. I earned quite a bit more last year and didn't save more to compensate. If you're in that boat with me, I want to encourage you to reach out to the IRS.

They aren't as scary as you think. Or at least they don't have to be.

I have friends who have made good on years of unpaid taxes, and they did it all by calling and going down to the local branch of the IRS and talking with the nice folks there.

Just like any other creditor, all they want is their money, and they will work with you to get it however they can. Here are your options:

File for an extensionI wouldn't be surprised if a record number of people do this this year. By filling out form 4648, you can automatically extend the date by which you must file your tax return.

The downside: You'll have to pay interest and penalties on the money you don't pay now, so be prepared to cough up more.

Pay what you canIf you owe $2,000 but won't have it for a few months, you can pay, say, $500 by the 15th. Then, in a few months, you'll get a big scary letter from the IRS informing you of how much you owe and pay the rest then. If you can't pay it all then? Pay what you can and wait for another bill. Or get a payment plan.

The downside: You'll get a penalty, but it won't be as hefty if you don't file at all.

Sign up for a payment planThis is so easy it's silly. I did this two years ago. Online. In 10 minutes. And it was over with. You can name how much you pay, and have it automatically withdrawn from your account. And you may not know it, but you don't have to pay a lot monthly for them to accept it. I paid $30 a month till it was paid off, but it wasn't a burden on me and I always knew I could meet the bill.

The downside: Again, interest and penalties.

Put it on your credit card and file for bankruptcyMy accountant told me this option as a joke (I always emphasize with him that I want all my options, no matter how far fetched). But it it a legitimate option the IRS even acknowledges--the paying with credit part, not the bankruptcy part.

Sunday, March 29, 2009

The month isn't over yet, but we're not far off. So I wanted to propose a few ideas for the next challenge, which will begin on April 10th. Comment to vote for one, or propose another idea.

30-Day Marketing Challenge, Part 2: In this economic climate, one of the few things you can control is how much you market. So it might be worthwhile to take another crack at this.

30-Day Persistence Challenge: When the money's not rolling in, how do you convince yourself to keep marketing, keep doing the daily drudgery you'd rather avoid? This challenge will highlight ways other freelancers build the marketing and other daily tasks into their lives, and ways you can do it, too.

30-Day Networking Challenge: Now more than ever, it's who you know that helps keep your business growing. But if you're shy, busy or otherwise have a hard time prioritizing getting out and meeting others, how do you do it? This challenge will share how.

Friday, March 27, 2009

Yesterday's post on health insurance for the creative freelancer left me a little deflated. There might be one group there that might offer me better health insurance, but most of them were for New York City freelancers and therefore no use for me.

So what do you do if you don't live in New York and still want the warm embrace of group health insurance? Consider these options:

Your local Chamber of CommerceI know most creative professionals think of chambers of commerce as a place for local restaurant owners, accountants and the owner of the biggest bowling alley in town--in other words, not our crowd.

But somechambersofcommerce offer health coverage for sole proprietors and small businesses. All groups have dues, some of which are deductible, but you get the bonus of networking with professionals who could use a good writer or editor. Doesn't seem like a bad deal.

National Association of the Self-Employed (NASE)Hundreds of thousands of entrepreneurs belong to this group, which offers discounts on everything from roadside assistance costs to term life insurance. It offers health insurance through the MEGA Life and Health Insurance Company. But beware: There are red flags on this company at sites such as The Ripoff Report and Attorney Pages. I haven't been able to find any reports on this from legitimate news sources, and would love to hear if you have experience with this company denying claims in bad faith. If that's the case, I don't see the difference between having health insurance through them and the individual market.

I also received a call from a group called One Person Group, which offers group health coverage to self-employed and sole-proprietor professionals. It claims to be the first of its kind, and I'd love to hear if there are freelance writers who use it and how they like it.

Know of others? Leave them in the comments so other freelancers can benefit from your knowledge.

Thursday, March 26, 2009

As Randy mentioned in yesterday's post, a great way to get good coverage and avoid the perils of the individual market is to get insurance through professional organizations. I looked into this when I was searching for better insurance than the HSA and HDHP I had. Here's what I found.

The good news: If you're in New York City, you get healthcare through Oxford Health Plans, IRBA plans Atlantic, HIP and GHI.

The bad news: Outside New York, you only have an option of--surprise--an HSA or a PPO Copay plan. And that insurance has a $25 million cap, which seems like a lot until you develop a costly illness such as multiple sclerosis or parkinsons disease.ASJA (American Society of Journalists and Authors)The yearly membership fees of this huge freelance writers' group are similarly large: $195 a year plus a $50 nonrefundable application fee and a one-time $75 initiation fee upon joining. But once you're in, you'll get discounted rates at their popular annual conference in New York, access to inside information about markets and pay rates, and other benefits. You'll also have the option of joining their health insurance pool.

The bad news: They only offer insurance in 30 states and companies still do underwriting, meaning they can charge you more if you have chronic medical conditions. Sometimes this makes the insurance so expensive, it's unaffordable.

The Author's GuildFor $90 a year, you get access to all kinds of benefits, including copyright and contract help. And if you live in New York City or Massachussets, you'll have access to health insurance starting at $334 a month.

The bad news: As the site says, "Although we offer plans for California, Connecticut, Florida, New Jersey and metropolitan Chicago, rate increases have rendered those plans unaffordable to most members. Understanding the importance of these benefits, our staff is continuously working to provide affordable group health plans for our members."

Editorial Freelancers AssociationFor $125 for those in New York City and $105 elsewhere (and a $35 processing fee), you can join this group, which is aimed primarily at editors and copywriters. You'll get access to it's online membership directory, job list, email discussion list, and local events, as well as health insurance. They offer a variety of health plans, including the Health Insurance Plan of Greater New York (HIP, which Randy referred to yesterday), The Entertainment Industry Group Insurance Trust (TEGIT), and the discount (NOT health insurance) firm Careington International. It's unclear which areas are covered outside New York City, but it looks like some plans may cover Chicago, Connecticut, California, Florida, Texas, Arizona and Virginia. Some rates are available, in the $400 range for individuals and the $1,200-$1,400 range for families--but those rates for are New Yorkers.

The National Writer's AssociationThis group, which seems to be aimed at fiction writers, offers health insurance through Med Choice One, a company that seems to be a group of insurance consultants who help people find decent health insurance through the National Association of Independent Business. No information is available on their site about how much they charge or where their insurance is available.

Have you noticed a theme here? If you live outside New York City, you'll be hard pressed to find decent health insurance through any of these groups, it seems--though if you think you might qualify and want to join, do more research.

Tomorrow, I'll add a few more places to look for group health insurance, closer to home.

It is my informed opinion that no one should avoid an HSA-qualified high-deductible health plan (HDHP). The longer you own one the more lucrative having one becomes. However, it should be noted that prior to age 30 the premium difference between an HSA-qualified HDHP and a more traditional health insurance plan (with all the "first dollar" bells and whistles) is almost non existent. This being the case, younger families can enjoy a more traditional health insurance plan with "first dollar" coverage for about the same premium. However, they will not have the unique tax advantages allotted to those who own an HSA qualified HDHP.

I'm going to take the contrary view on this, not only as someone who started her freelance career with an HSA and as someone who's written about them. Your mileage may certainly vary, but when I was looking at them, I had a hard time finding any critical information on them. In an effort to provide you with more information, I've compiled the following.

About HSAs and HDHPs

Here's the deal with HDHPs and HSAs: HSAs are the Individual Retirement Account of the health insurance world. They're essentially a tax-protected savings account rom which you can draw funds to cover approved health expenses. These are pretty generous: They cover everything from chiropractic to emergency room visits. However, in order to use one, you must have a corresponding HDHP. Deductibles range from $1,000 to $4,000 and premiums can be anywhere from $150 to much much more. The idea is, the money you save will be invested in the stock market according to your wishes and, when you have money left over at retirement you can use it for anything you want, not just health costs.

Sounds like a good deal, right? But let's look at the potential problems:

Not enough money

The attraction of high-deductible plans is that they are inexpensive, catastrophic coverage that can at least get you in the door of a doctors' office or emergency room. But they aren't so cheap when you really look at them:

The saving problem: In an ideal world, you'd take the difference between what you'd pay for a full-coverage plan (in some cases, up to $1,000 a month) and what you'd pay for a HDHP ($200 or so a month) and put it in the HSA. That way, when you need healthcare, you can draw down the account without having to pay a lot if you're relatively healthy. But as I've written elsewhere, most Americans are abyssmal at saving. Unless you can save the equivalent of your annual out-of-pocket expenses (in some cases $10,000), you may go into more debt with an HSA and HDHP than without it.

The coverage problem: The reason you could incur serious debt is because you must pay out-of-pocket for all your health expenses until you hit your deductible. The plan I got had a $4,000 deductible. I didn't have $4,000, let alone the money to meet the deductible. What's more, my particular HSA and HDHP didn't cover prescriptions. So I ended up paying $150 for a bottle of allergy spray. No kidding.

The fee problem: Tucker says the longer you own one, the more lucrative it becomes, but that wasn't my experience. I wasn't a good money manager--I'll be the first to admit it. What I didn't count on what that most HSAs charge you fees. When I finally closed the account because I signed on to a big HMO, I expected to get $20 back. I got $0.11. The bank took the rest in fees.

The reason so many people choose HSAs and HDHPs is because they don't have $1,000 or even $400 to spend on health insurance a month. And with budgets strapped, it can seem easy to slide off on saving money in your HSA. As writer Beth Goethe shared when I asked about health insurance on LinkedIn:

It tickles me that we talk about a health care crisis in this country. The health care is not the crisis. It's a health care INSURANCE crisis. There is plenty of care, but no way to pay for the insurance. Sorry to disappoint, but medical savings accounts are not as impressive as they sound.

Tax time

Tucker says HSAs and HDHPs offer "unique tax advantages." That they do, if you have cash you want to protect from the IRS. But as a self-employed person, you might get just as much of a tax savings, or even more, from getting a high-premium, full-coverage plan if you can afford one.

Interestingly, Heather, I've learned to take the opposite approach presented by the first two posters [who advocate HDHPs], something I was taught by Bob McGarvey. I buy relatively high-end health insurance with a low deductible because it's far more advantageous come tax time. Premiums are guaranteed to be expenses you can deduct off your 1040. But high insurance deductibles/co-pays may not be. Too many freelancers treat insurance as something less than a necessity when they ought to give it the same regard and priority they give to housing, utility and food expenses. It's a necessity, and my suggestion to anyone considering a switch to self-employment would be not to do it until they were confident of making enough money to pay for decent coverage.

I've been on a HIP plan for 7 years or so by way of Media Bistro, which itself actually piggybacks on the IRBA health plan. I'm probably going to make the switch to an Oxford plan offered through the Authors Guild, but not for reasons of economizing--simply because a doctor I like no longer takes HIP but does take Oxford. In either case, my monthly insurance expense is slightly higher than a third of my monthly housing expense (though I should qualify that by saying my monthly housing expense is low by NYC standards because I bought my apartment 20 years ago). My suggestion to anyone who's shopping for health insurance is to compare the plans available from any professional associations they're qualified to join--and to get quality rather than bargain-basement coverage, both for peace of mind and for the tax deduction.

Bottom line: The fact is that the U.S. Government Accountability Office found that the average income of someone with an HSA was $139,000 and that 41 percent of people with an HSA didn't draw money from it for health costs. It was a tax shelter. If you actually plan to use it, HSAs won't be the great investment you hope it will be.

I watched Sicko the other weekend. Well, I watched part of it. Okay, 15 minutes. Then I had to turn it off.

Anxiety rose up in me because I knew what the people Michael Moore interviewed experienced could easily happen to me. I'm self-employed. I'm on individual health insurance. And I discovered by reading the fine print of my renewal notice at the end of last year two things:

My insurer will increase my premium twice this year.Once for the annual increase and again when I turn 35 and jump to the next age bracket. I'm anxiously waiting for that letter informing me of how much I'll be paying.

My insurer will review my "membership" in their health plan monthly this year, instead of annually.Meaning? I assume it means if I get some dread disease in June, I'll be out of health insurance in July. I'm grateful I'm healthy, but I shouldn't have to be lucky. I should have some kind of decent health insurance that does what it promises it will do--cover me for any expenses that develop from a new health condition. I don't trust them. Nor should I.

Still, I know I am lucky to have health insurance, which has covered my allergy spray and treated me for an abscess on my back last year that just finished healing. If I didn't have that, I don't know what shape I'd be in now, financially or physically.

Since this blog is about serenity, I will not subject you to the blood-pressure-raising statistics about healthcare and bankruptcy. But I will say that this is such a major component of economic stability in this country that it's getting a full week of posts on the subject.

I'll cover the options available and whether you should consider them, with the help of some experts.

But today, I want to ask you two things:

How does having health insurance contribute to your self-employed serenity, however you define that?

Friday, March 20, 2009

Yesterday, I shared a few ideas of how to save. But I've noticed a resistance to saving in myself. That resistance is, frankly, that I'd rather spend the money on stuff I can have now than just have money laying around.

I don't feel as good viscerally about saving as I do about spending. Even though I know intellectually it's better for me, it's more satisfying to spend. I'm working on changing that perception.

How? I'm creating a personal marketing campaign for myself. The great blog Take Back Your Brain! is all about creating these kind of marketing campaigns, to get yourself to do things that are more satisfying than simply buying whatever they're selling today. Their approach goes something like this:

Fifth Avenue spends millions--maybe even billions--every year to convince you that you need the new iPhone, the new Wii, that new handbag or this new dress. If you saw as many ads for the things that would bring you real happiness and serenity, you might be as likely to do them.

Save the money FOR something. You probably don’t want to save money for its own sake, but because of something else it can secure for you. What is that?

Find an emotional hook. Why do you want that thing? What is it about it that motivates you? Remind yourself about that.

Help yourself visualize the outcome. Bombard yourself with images of yourself already having it (ideally with fun, attractive friends…).

Be relentlessly aggressive. Use multiple modalities and repeat often. Adapt the campaign as you go along.

I can relate to this. Recently I got the surprise gift of $50 unlimited calling on my cell phone. All of a sudden, I was struck by the uncontrollable desire to have a Google phone. Oh, sweet Google phone, I long for your constant internet connectivity, your maps and full keyboard. Right now, I have just a phone phone--no internet, barely any texting, not even bluetooth. But it's, you know, a phone. It works fine. Still, as soon as I got that new plan, I started fantasizing: I could imagine myself with it, how much happier I'd feel, how much more efficient and effective I'd be in my business.

Saving money never gives me that feeling. I am, as a friend likes to say of herself, a seive for money. I can't hold it. There's always something I want more, something way more exciting than just having financial stability.

But now I'm realizing I need it--more than I need a Google phone, an iPhone, or a new pair of boots. The problem is, I can imagine myself with those things. Since I've never been good at saving, I can't imagine myself doing that. So I need to train my brain differently.

The way I'm doing that is by creating a vision board for myself. I know, hippie dippy. I'm not a fan of the Secret--the law of attraction is nothing without a plan and regular action toward that plan--but I find vision boards help retrain my brain the way TBYB! describes. I have two already: One for my life in general and one on how I want to feel about my work. I'm creating a vision board for how I will feel when I have 6 months income in savings.

The primary image I have in my head, which I haven't yet found, is of a thick glass bowl filled with money. To me, it's the antidote to being a seive for money. I love the idea. Holding it, keeping it, seeing the money overflowing. That's an image I can get behind. It makes me feel secure and confident. I imagine how much more sturdy I'll be when I have it. Words like "independence" and "control" come to mind.

I'm cutting those words out of magazines now to put on the board. I'm also looking for images of people enjoying retirement, because I want to save for that, too. I want that feeling of having enough, which often eludes me.

One thing that all of this cutting out old magazines is teaching me is that I read the wrong magazines. It became clear to me early on in the magazine-cutting process that almost none of my magazines were good for this. All my women's magazines, in fact, were all about spending--all about divesting myself of money in exchange for the short lived confidence of looking hip and cute and in the club.

I'm preparing to subscribe to my first financial magazine, because I want to fill my brain with that stuff on a regular basis.

The 10 percent trickIn this method, you take the first 10 percent of every dollar that comes in and put it automatically into a savings account. You can do this by automating a withdrawal from your checking account to a high-interest online savings account, or you can transfer money every time a check comes in.

Add it to your spending planRecently I lamented to a self-employed friend that I have a hard time saving money. What she told me really stuck with me. She said, "I started out putting aside just $5 a month. I know it seems like nothing, but now I have $35,000 in savings." My spending plan includes a line for $20 in savings every month. It's not $5, and it's not 30 percent of my income, but it's something, and that's the whole point.

Do 50/40/10For the past two years, one of the ways that's helped me save is to look at the money I earn above and beyond my monthly spending plan and divide it this way:

50 percent goes to savings;

40 percent goes to accruals;

10 percent goes to fun.

This has worked incredibly well for me because it really encourages me to earn more than I need to live on. Not only does money go into savings, but I also get to spend some of it right away--and that rewards me for increasing my income in a tangible way.

Designate a check for savingsI'm an impatient type. Saving $20 is the responsible thing to do, but when I've wanted something right away, it's worked better for me to just designate one incoming check toward an accrual category. Over that past year, that's allowed me to take three trips and pay for holiday presents. Of course, this assumes a decent income, but if you're making plenty of money without having much savings to speak of, this is a way to jump-start your new savings habit.

Wednesday, March 18, 2009

I couldn't say this any better, so I'll just let freelancer Lorelei Laird speak for herself. Laird is a freelance writer specializing in writing about the law for businesses, marketing and publications.

Unfortunately, some clients just don’t want to honor their commitments. After you’ve tried Kristine Hansen’s collections suggestions with no luck and you’re pretty sure the client has no intention of paying, it may be time for small claims court. Heather asked me to write this post because I had good luck when I filed a small claims case of my own, and perhaps also because I am a freelancer who specializes in writing about legal issues. However, please note that I’m not a lawyer myself and none of this is intended as legal advice!

Luckily, you don’t need a lawyer for small claims court, because it’s specifically designed for people representing themselves. (In fact, here in California, you’re not allowed to have a lawyer in small claims.) The courts usually provide information to help people without much legal experience figure out what to do. I strongly recommend that you follow that advice -- I actually prolonged my own case by not bothering to read their advice on finding the defendant (the person being sued).

The following tips are based on my own experience in Los Angeles Superior Court, but I’ve tried to keep them general enough to apply to any case.

What Do I Need to Sue?For starters, the amount you need to collect must be less than the maximum for your state -- $7,500 in California. You will also need:

Proof that the client owes you money. Your contract should be enough proof, but if you don’t have a contract, don’t worry -- you should still be able to collect if you have other evidence that an agreement between you and the client exists.

All of the written documentation of any kind -- including email. Print it out or make photocopies. This is the evidence for your case.

To generate more evidence, consider sending a certified letter demanding your money, so you can show that they definitely received the demand and failed to pay up.

Filing fees are typically low -- I think I paid $25. If you’re not doing well financially, you may be able to get the fee waived.

If you, like me, are not very detail-oriented, suck it up and become detail-oriented for this. It’s very important to follow all the rules when you’re dealing with courts, because one little mistake can get your case dismissed. You’re welcome to re-file, but it’s more time and money that you probably don’t want to spend. So make sure you meet deadlines, use the right legal name for the business, choose the right court, etc. The small claims documentation and any legal advisors the court offers should be able to help you with this.

Where Do I Sue?If your contract doesn’t specify where disputes will be heard, check with your local court. Los Angeles Superior Court says the right place to sue is the place where the defendant’s business is, or the place where the contract is signed or carried out. I had to go to a courthouse across town because the client was in LA, but in a different part of LA from me.

If your client is out of state, I’m sorry to say that you may be stuck suing there, depending on your state’s rules and the circumstances. If your contract locks you into out-of-state courts, but that contract was clearly violated, you might be able to argue that the whole thing is now void. If you have lots of time, it might be worth filing at home just to see if you can argue that that venue is proper -- but it might be an uphill battle. And if you have to go out of state, you can try to file from a distance and see if they settle before you make plans to fly there.

How Do I Sue?In short: You go to the courthouse to get the small claims forms, fill them out, attach any relevant documents, and file the forms. In downtown Los Angeles, this involved a lot of waiting in line, sometimes with crazy people. Don’t park at a meter if you can help it and bring a book! Once you’re filed, they’ll give you a court date.

By the way, I strongly recommend that you add the cost of your time and the case itself to your claim. That is, if they owe you $1,000, sue them for $1,000 plus:

Court fee;

Any process server fees (see below); and

Your hourly rate for the time it took you to do all this.

You would never have incurred any of these costs if they had just honored their commitment to you, right?

But that’s the first half. Once everything is filed -- correctly -- you still have to serve the small claims documents on the person you’re suing. The deadline for this in California is 15 to 30 days before your court date, depending on where the defendant is. To serve the claim in California, you can pay a professional process server or a sheriff to do it; pay the clerk of the court to do it by certified mail; or ask a friend who’s not involved in the case and over 18 to do it for free. I used my boyfriend, who, miraculously, did not break up with me over the multiple late-night trips across town.

Tracking down the defendant so we could serve them was by far the most arduous part of my case (well, after parking downtown). The business had closed and the owners had moved across town. Finally, I thought to read the advice in the small claims documents and looked up the owners in county property records. There they were! Use your reporter skills to do public records searches -- business filings, property records, prior court cases. This will help you locate the defendant and learn the proper legal name of the business. And it made me feel like Nancy Drew.

Going to CourtGood news: You may not even have to go to court! In my case, the defendant paid up as soon as we managed to serve it. That’s typical for large-claims lawsuits as well, the vast majority of which settle before trial. However, if you do go to court, take it seriously. Show up on time, dress appropriately (think job interview or religious services), bring all of your documentation and turn off your phone -- judges hate being interrupted by phone calls. Expect to wait a long time for your turn, at least here in LA. When it’s your turn, treat the judge and other court employees respectfully and answer everything you’re asked. You’re welcome to bring someone for moral support, but that person can’t speak for you.

If the other side doesn’t show up, that’s great for you -- the judge may penalize them by deciding for you. I am told that small claims judges are very accustomed to seeing freelancers suing their ex-clients, especially in New York City, home of many freelancers. So if your case is solid, your chances are fairly good.

For More HelpHere in California, we have a Small Claims Advisors program providing advice to people with small claims cases. The number for Los Angeles County is (213) 974-9759, and in San Francisco, it’s (415) 292-2124. New York City seems to have a similar in-person program. Of course, you can also draw on a friend or relative who’s a lawyer for general advice and scary demand letters on law firm letterhead.

Above all, please do not feel guilty about this. If you are legally owed this money and the client has repeatedly refused to pay you, you are not abusing the system or being unkind -- you are enforcing your rights.

Tuesday, March 17, 2009

Yesterday, I shared why I use a spending plan instead of a budget. But now that you know why you should have one doesn't mean you know how to create one.

I regularly send clients my own template for a spending plan, but here, I'll share how to make one of your own:

Step 1: Gather the tools.You don't have to use a fancy budgeting program; you don't have to even know how to use Excel. What you do need is a little notebook like one you can get from Walgreens or another drug store and a pen.Step 2: Track your spending for one month.Here's the trick of tracking spending: Unless you have an encyclopedic brain--on which many of us in our busy lives can't afford to rely--you'll forget what you spend unless you bring that little notebook with you. Stash it in your purse or keep it in your pocket. Whatever you do, just try to remember to write down everything you spend and on what: lunch with an editor, toiletries, shoes, groceries. Who cares whether you used a credit card or cash for it. The important thing is to know how much you spent and on what.

Step 3: Trust that you won't be punished.The biggest barrier to starting this process--which I've now done for two and a half years--was the fear that someone would see it and tell me I was spending my money wrong. I was afraid that what I wanted to spend money on was frivolous or that I should buy any luxury items until I was making more money. Turns out, I wasn't spending enough money on basic needs like household supplies and entertainment ($10 a month, I think many will agree, is not enough). Until I got that keeping track for a spending plan was different than keeping track for a budget, I wasn't willing to do it. I had too much shame.

Step 4: Do a tally.At the end of the month, make a list of everything you spend your money on, and then start correlating things that go together. Everyone's line items will be different, but mine include:

Food in

Food out

Entertainment

Clothes

Personal care

Rent

Health insurance

Gym

Web maintenance

Printer ink

Office supplies

Taxes

Internet

I also separate these categories out: one list for personal expenses and a second for business. Here's a hint: This kind of record keeping will make tax time hugely easier for you. When preparing my taxes this year, it only took me a few hours because everything was laid out in easy-to-understand categories.

Congratulations. You now have a spending plan. Those categories, whatever they are, are your spending categories. Don't worry if some of them were surprise expenses that aren't monthly--just create a "Surprise Expenses" category and stock it with that money. You'll be surprised as you keep this up how often you have surprise expenses--and how unsurprising they become after a while. You can add and change them at will, but this will give you a framework and help you see what you love spending money on.

Step 5: Round off.Now that you know what you actually spend, round the numbers to whole numbers. I try to round off to the nearest five or 0. Remember that this is just an estimate, and you'll refine it as you use it more.

Step 6: Add it up.You'll probably want to add this number up, and please feel free. But remember, the analogy between a budget and a diet holds true for this final number, too. Just like you aren't a numbe on a scale, you aren't a number in a spreadsheet, either. You may find that you spent less than you brought in last month, or you may find that you spent more. Just remember that it's just a number and it doesn't mean you're a bad person or bad business person if everything doesn't add up perfectly or if you're spending more than you're bringing in. Join the club. Many of us do that.

An income plan is quite different from a spending plan. Just stick with the spending plan for now.

Step 7: Share it with friends.I know that sounds crazy. Who wants to share their financial state of the union with a friend? Many of us have a hard enough time talking about money with our loved ones and family. But it's important. How does it feel? Now's a good time to rally your support people and talk to them about your spending, what scares you about it and how you want to proceed. Whatever it brings up, be sure to share it. Keeping it in will make it that much harder to stick with the plan.

I know. I spent years drafting budgets in Excel, only to abandon them almost immediately. For me, a budget is like a diet--all about what you should be cutting out instead of what you get to eat. So a key to my financial solvency is to draft and follow a spending plan every month.

I'm not the first to talk about this. Lots of other bloggers and financial minds have covered this topic. And clearly I don't know what will work for you. But for me, a spending plan is the answer because I'll do it--and I won't do a budget. I've been keeping a spending plan and tracking my spending for about two and a half years now, and it's contributed greatly to my serenity by showing me where I'm spending my money and what I value. Plus, knowing how much I need to make based on spending gives me the motivation to earn more because I know what I'm getting for the money.

Here's what I love about a spending plan:

It acknowledges that money is emotional. If I just look at a budget, I can see where I should spend my money--what would get me to one goal the fastest--but my experience with money is that I never have just one goal. Each financial decision is a juggling of a lot of wants, needs and guilt and desire. A budget doesn't have room for that. A spending plan gives me breathing room.

It lets you have the things you love. A budget might tell you that the $4 frapaccino you buy every week on the way to a specific meeting is frivolous. But maybe that $4 coffee drink fills you with such joy and happiness, it's one of the bright spots of your week. If so, a spending plan lets you keep it while a budget would tell you to forgo it for some other, greater end. I do that with expensive hair products. I could get $4 shampoo at the grocery store, but my spending plan includes a considerable amount of money for the salon version because it's my one big splurge a month. I don't get my nails done, I don't shop at Bloomingdales. I treat my hair to a spa every time I wash it. It's worth it to me.

It stops you from having a power struggle with yourself. I don't know about you, but a budget always made me feel like I was doing something wrong. If I were budgeting, I'd spend that money where I was supposed to (that diet thing again), but feel mad, resentful and guilty about not getting to have the fancy conditioner. Now that energy is freed up to earn the extra money I need to afford the fancy conditioner.

It lets you want things. My spending plan also includes a number of so-called accruals--that is, things I can't afford now but that I want. Before using a spending plan, I always treated those things as luxuries, not realizing that some were literally necessary and others brought me joy. Now I can have accruals for things like a new computer as well as new boots. I don't have to do it right. I can just do it.

It helps me prioritize. The great truism of money is that you can have anything you want but you can't have everything you want--at least not all at once. So I've had to sit down and figure out which thing I want first, or most. If it's a matter of saving for a computer or an ergonomic chair, a spending plan lets me put both on the list but then helps me see that I get to have one first. Which do I prefer?

Obviously, your mileage may vary. For those without such an emotional connection to money, a budget I'm sure would be fine.

Recently I sat down with a writer friend and helped him create a spending plan. He'd never had one because he thought he first had to increase his income. While increasing income is a noble goal, creating the spending plan actually gave him joy. He got to see that even on his small income, he could put a little away for reserves and even have some things he really wanted but didn't think he could afford, like accessories for his bike. It was great to watch the spending plan create some space and breathing room in him.

Perhaps your finger is on the financial pulse of the best: Orman, Warren, and Ramsey, along with grassroots money marvels like J.D. Roth of Get Rich Slowly and Trent Hamm of Simple Dollar. Maybe you're wondering if the advice still works for your self-employed status. As a freelance writer I was there once with tons of too much good financial advice and not sure how to customize my long-term financial plan.

Here's how I did it:

First Earn and Divide Your Money.

Be honest with what you're making or realistically will make by divvying up what you'll earn by client or service this year:

The first 30% of non-taxed income goes into an untouchable savings account.

Realize 50% of your take-home pay, no matter how it flucuates, goes to Must-Haves (rent, food, house bills).

Another 30% goes to Wants (cabel, clothes) and 20% to Save/Invest -- unless you are in debt.

Remove All Debt.

Yes, it hurts, and it might take years. If you cannot pay anything you own off in 20 months, get rid of it (omit a morgage). Your IRA or cable TV dreams -- meaning Wants and Save/Invest balances will suffer because you'll need to throw every available dollar at the past. But nothing improves your self-employed life for the better than getting out of debt.

Have the Necessary Insurance & Wills.

Have Health (and Car if you need it) right now, buying higher deductibles to lower your premiums. Pass on Life unless someone counts on your income; but having a Will and a Living Revocable Trust with an incapacity clause (handles your retirement/savings, loans) will be be a relief to your surviving loved ones.

Now You Are Ready to Save & Invest.

When the debt is gone and you're affording insurance, Save/Invest 20% -- broken down by putting:

10% in a Roth IRA or SEP; and

10% in an on-line savings account you'll call Emergency Fund, which accumulates to reach 4-8 months of income in case you lose a client.

Automatic deposit means commitment. Think about stowing a portion of your 30% Wants into another account for "unexpected-expecteds" like new technology, insurance dues, professional organization fees so the bills don't disrupt your monthly budget.

Funding Big Dreams Comes Last.

When the Emergency Fund gets maxed out, you'll put that 10% into an account for a home, vacations, or organizations you can get behind. Maybe beef up your Freedom Fund more.

That the above is easier said than done is an understatement. Regardless, the advice still rings of truth, no matter how you scoff, grumble or worry about it. Learning the new realities in order to financially successful -- whether self-employed or not -- is about prioritizing, focusing and developing better money habits.

Tip #1: Have regular clients? Ask for a raise.Freelancer Laurie Pawlik-Kienlen responded to this weeks post with her own experience:

"Another possibility is asking your low-paying gigs to up the ante a bit," she wrote. "I did that once, and it went over like a dream! Perfectly."

It can seem insane to suggest such a thing in this economy, but I suggest that it's not. If you're going to do it, however, you'll also have to convince your client you're worth it. Look at your track record with them:

Have you turned in every story on time?

Have you turned them in early?

Have you met word count and story specifications regularly?

Has your editor sent you emails of praise?

Show your editor that you are the perfect person for the job and that you deserve it. In biz parlance, that's called "added value." Linda Formichelli at The Renegade Writer Blog had a fabulous post on added value this week. I highly suggest you check it out. In it, she shares five ways you can add value, including working quickly, knowing your stuff, bringing expert or "real person" sources to the table or thinking graphically.

But those aren't the only ways to add value. This is an opportunity for you to assess your strengths for your client. It will definitely build your relationship and you may get a raise in the bargain.

Tip #2: Ask for checks early.

Again, sounds crazy, right? Right now we're getting checks later and later--not sooner. But I'll tell you something: I did it in February and my client sent me a check a week early. Easy peasy.

There are rules to this, however:

Use this infrequently. If you come to your client every month or every time you have a check coming and plead for a rush order, you'll look like a bad financial manager, not a professional writer. Save this for when you think you absolutely need it.

Ask the right person. As Kristine Hansen mentioned in her guest post on collections, your editor doesn't handle your checks; the Accounts Payable person does. So don't hassle your editor. Instead, ask for the Accounts Payable department. You don't even have to get your editor involved. I've just called the main number and asked for the AP department directly.

Don't take it personally. Asking for your money early can feel like begging for money, but it's not. It's just that--your money. When I first started managing the financial side of the business, I was terrified to call accounts payable, in part because I thought as a writer, I shouldn't care about money. Now when I make those calls, I don't do it as a writer; I do it as a business person. AP gets calls all day long about checks. That's what they do. It's normal for them. Don't make it harder than it has to be.

Have you tried either of these techniques? How have they worked for you?Photo by Daquella manera.

I especially like her method because it creates a "personal line of credit" without using a credit card or those home equity lines of credit The Simpsons lampooned on Sunday.I hope you, too, will find it inspiring. I challenge you to look at your spending and see if there are funds you can reallocate to create your own cashflow line of credit.

Sturgeon is a Greenwood-based writer with more than 20 years of professional writing experience. Her resumé covers everything from lifestyle reporter to investigative reporter, sports writer to editor of two business-to-business magazines. She is also a former winner of the Writer’s Digest magazine feature article contest. Besides writing, her passions are traveling, Indiana University basketball and the movie Braveheart.

Back in April of 2001 — before the 9/11 attacks, a dot.com bust, Hurricane Katrina, a stock market crash and recession— I interviewed an analyst about cash flow for a trade publication.

“A small-business owner has to stop worrying about profit and loss and start considering cash flow the lifeblood of the business," Alice Magos with Commerce Clearing House told me. "You can be terribly unprofitable and still survive as long as your cash is flowing — but by the time somebody learns that the hard way, they’re usually out of business."

It was a great quote in the article, but I wasn't a believer until my uncle confirmed it. My uncle, the small-business owner who has had his name on the outside of a funeral home for decades. Mu uncle, the man we considered the rich family member because he could actually spend money shooting at basketball hoops at a carnival until he won the big stuffed animal prizes. Yep, he confirmed, he rarely showed a profit on his taxes.

So I got it: The trick is to have money at your fingertips when you need it. But it wasn't something I focused on. After all, the cash was flowing automatically as I continued to earn more every year and incorporate my business. I set up charts to rate the profitability of each client. I cut the bottom 10 percent each year to improve those profitability numbers. I raised my minimum several times to maximize my time in the office.

And now it’s 2009, and suddenly whether or not any particular assignment earns my hourly minimum is moot. I need X dollars in my bank account each month to pay my set expenses. My accountant suggested we set up a small line of credit at the bank to draw from on those months when collections trailed behind the bill due dates.

My husband had an even better idea. He added up our mortgage payment, our monthly payment on the home equity line we took out to remodel the kitchen, and the amount we were paying back to our 401(k) plans we borrowed from when a business failed in 2007. If we remortgaged to roll all those into one payment, it would extend our timeframe to own the house free and clear from 8 years to 15, but the new interest rate meant that one payment came to only a few dollars more than the current mortgage. Essentially, the plan freed up nearly $1,700 a month in financial commitments in our household.Starting this month, we are putting that money into a savings account as my personal line of credit. I’m not a big stickler on profit these days — in fact, I’ve lowered my hourly minimum expectations by $25 an hour — but I have the safety net I need to avoid being abused by slave wages, too. And should I need to draw on those emergency funds, I’m confident my husband will have a kinder interest rate than the bank.

Monday, March 9, 2009

So often on freelance boards, writers pose the hopeful question: What do you do to bring in more money this month? We aren't talking about raising your income in the long run. Sometimes, you just need money now.

There are a few options, but proceed with caution:These suggestions are not a replacement for a business plan or a marketing plan. You will not last as a freelancer if you try to use these suggestions to keep your business afloat. They are stop-gap measures, and as such take you away from the focus you've created with your plan. As writer Merydith Willoughby replied when I posted this question on LinkedIn:

Writing has to be considered a business: You will have to make your mark in the particular genre you write in, be excellent in your field and work your butt off to make links, contacts, etc. Once you've achieved all that, yes you can achieve your goal. It takes time, hard work, years, stamina and patience and a willingness to always improve what you are doing. Other than that, yep - it's easy.

The other bad news is that there aren't many options that both pay well and pay quickly. Usually you get one or the other. What's that old saying? "I can do it quickly, I can do it well or I can do it cheaply. Choose two." The same usually goes for freelance writing, only instead of choosing between cheap and fast, you're choosing between well-paying and fast.

Having said that, here's what my LinkedIn colleagues had to say:Option #1: Low-paying but regular clients

In Six Figure Freelancing, one of the things Kelly James-Enger impresses upon new freelancers is that it's important to just get a stream of money coming in. For her, it was writing for hospitals. For me, it was doing movie reviews and advertorial. Sure, they paid terribly and took up a bunch of my time, but I like movies, and they paid a week after I turned in the reviews.

This is what freelancer (and full disclosure: friend) Vanessa Richardson does. "[My way of making money quickly from writing] is writing a lot of blog entries for this AOL website that pays little but at least pays on time."

Finding these can be relatively simple. Low-paying work is available on Craigslist, MediaBistro and elsewhere. The key is to keep it a small part of your income stream and your time commitment so you don't fall into the trap I did: Spending so much time doing low-paying work you don't have time to query higher-paying markets. If you've managed this, I'd love to hear about it.

Option #2: Tutoring

If you're a decent editor and can get your hands on a Chicago Manual of Style or other style guide, you can post signs around local universities, advertising your editing skills for students needing help with their essays. You won't make $1/word rates, probably, but you will make a decent amount to fill the gaps.

The same goes for this idea. Dave Gardner, a writer and editor with 27 years experience has a lot of practice "getting new jobs after others go south." This is one of the ways he does it.

"I've been helping folks with their resumes and cover letters," he says. "The economy makes resumes and cover letters something a lot of folks need. They need them now, they pay quickly, and they appreciate what you've done for them. It just takes a little advertising (a flyer at the local unemployment office and at the temp agencies works well) and networking when out and about."Option #4: Selling a Story a Minute (Almost)

Outgoing? Like strangers? This idea might be for you--emphasis on might.

"There used to be a guy in Chicago who would set up his manual typewriter on a street corner and write a 2-minute novel about your life," says writer Bob Rosenbaum. "He'd ask you about five questions and then bang out two paragraphs about you with a beginning, middle and end. All for whatever amount you wanted to put into his typewriter case."

What I didn't includeYou may have noticed that I didn't include those freelance boards where you compete with other writers to land short-term assignments. That's because I consider them both not writing and not useful to any kind of freelance writing business model. Think about it: It's about stringing keywords together to lure eyes to ads, not writing. And for the pleasure of doing work that isn't fulfilling, you'll get to compete with other freelancers, drive down the price, and usually pay some kind of monthly fee. That's not worth it, and I'm willing to bet you deserve better.

Have other writing-related ways to make quick cash? Share them in the comments.

Friday, March 6, 2009

One of the things freelancers hate the most about the business side of the job is collecting money that's owed to them. In this economy, doing it is becoming even more important, and common. So I've asked a fellow freelancer Kristine Hansen, to explain how she tries to avoid having to do collections in the first place, and then how she approaches it when she has to do it. It turns out that it's much easier than you may think--and it requires more persistence than perhaps you'd like.

Hansen is a freelance writer in Milwaukee and covers travel, food/drink and eco-living topics for many national publications. She just entered into her 10th year of freelancing. Read more about her at KristineAHansen.com.

How common has it been for you to have to go to bat to get your checks? Has it changed recently?Having to chase down checks has, fortunately, not been something I've had to do often. I intentionally seek out magazines that seem to be viable and are committed to paying on time and in full. (Note: Having a solid network of writers who dish on their clients is key to finding them!) My first brush with a "deadbeat client" came in 2000, right after I began freelancing, and it was because the Web site I had been hired to write for filed for Chapter 11. There has only been one other instance (see below).

What happened in 2000? I was doing a lot of writing for a Web site and it may have been because I was new to the business of freelancing, but I made maybe two calls to the subcontractor before giving up on collecting the $600 that was owed to me. Because the subcontractor pleaded ignorance but was extremely kind to me, I dropped my plea. I now realize that his demeanor was likely a ploy to put me off! If this were to happen today there is no way I would drop the matter so easily.

How much time do you spend a week on collections, would you say? Honestly? Other than the time it takes to drop relevant info into an invoice and then e-mail it, zilch.

Would you describe how you go about doing collections: How do you track when payment is due, how soon after the due-by date do you contact the editor, and how high up the food chain have you gone?

What I would highly recommend is sending the invoice immediately after filing your story. Each publication plays by its own set of rules for how it cuts checks. The more days you wait to invoice, the more likely your check could end up in the next cycle (lots of times publications cut checks in batches). Being a day late in that cycle could mean you are waiting an additional 30 days for the money. You'll know based on the contract you sign what the terms are (ie, how many days after either acceptance or publication the check is processed) and that helps you guess when "pay day" really is. What can sometimes happen is that the editor does not receive your e-mailed invoice. So that can hold up the process.

Give your editor a few days after submitting yours before sending a follow-up message to confirm its receipt. I keep track of three kinds of dates in an Excel file:

The date of the invoice;

Any times I'm in touch with the editor or accounting about payment; and

The date my check arrives.

For repeat clients, this makes it easy to determine a publication's pattern for cutting a check (in other words, how long it will take). One last thing to know is that its the accounting department that cuts the checks, and not your editor. So if your editor doesn't seem to be going to bat for you, politely ask for the name and contact info for someone who can.

What mistakes have you made with collections, and how would you advise other freelancers to avoid them?The classic mistake I seem to make more times than I'd care to admit is to not follow up on sent invoices.

You mentioned elsewhere that you hate having to be the "squeaky wheel" to get paid. Can you elaborate on that?

Just last week, I realized that a magazine's promises to cut a check were not coming through. Every few weeks I would receive an e-mail that announced the check was en route -- but in actuality, it was not. It occurred to me that being a squeaky wheel in this magazine's "engine"could result in a check being cut.

The good news is that it worked!

My editor had also become frustrated with the matter and while I knew she was doing her job to see that I got paid, I asked if there was someone in accounting that I could speak with. When I got this person on the phone, I calmly relayed the series of mishaps when she said that the check would go out in the next few days. I requested that the check arrive within the week and if not, I would be obligated to report this incident to the professional writers organizations I am a member of. But even as I was saying those words, realizing that they could be interpreted as a threat, I knew that I was doing what any other business owner would do.

Because freelancers are working project by project, there's a strong want to be pleasant, polite and flexible. That's hard to do in situations like this. But taking good notes on the correspondence you have had, and taking a lot of deep breaths helps. It's also helpful to view the discussions with a strong sense ofteamwork. It's not you vs. them. Getting paid is a natural step in the relationship a writer has with his or her editor.

Thursday, March 5, 2009

It wasn't that long ago that I was working nights and weekends and still not earning enough to live on. But it doesn't have to be that way. Over a period of nine months, I went to work to change the kind of work I was doing to increase my pay, decrease my work hours and make freelancing sustainable for me.

Since we've been talking about the scary parts of finance so far--the savings, the mindset, and all the things you should have in place before you start freelancing, etc., I want to spend today talking about the good stuff: What happens when all your work pays off.

But it was work. To wit:

Meet with a consistent group.I met monthly for a year with the same two self-employed people who constantly were urging me to move away from the movie reviews that paid me $50 a pop and the articles that paid 15 cents a word on publication. They did it gently, and kept at it until I was frustrated enough and bleary-eyed enough to listen. Then we talked about how to do it.

You don't have to have a group in place, but the key is to look for a mentor or two and set up regular meetings with the understanding that you're there to get help.

"Don't think about next month, think about November."This was the best single piece of advice I got during that time, and it was my guiding mantra. Every time I worried about decreased income from not doing as many movie reviews, or spending time querying instead of time watching movies to review, I focused on bringing my income up in six or nine months instead of how I was going to get through next month's bills.

Focus your marketing.I didn't have a specific income goal. The goal was simply "more than I'm earning now," which was what I needed. But I knew how I wanted to get there: I identified that I wanted to write for publications that paid $1/word on acceptance or more. Sure, it was easier to keep querying the low-paying markets that I knew were desperate for writers (guess why they were so desperate...). But I couldn't cling to them if I wanted to really make this my career. So I queried higher paying markets. I looked eagle-eyed for job ads and applied for every one I could find.

And when I got the assignment, I had to be willing to say no or negotiate if the pay was too low.

Take a class.It was around this time that I took Erik Sherman's Planning Your Writing Business class. It taught me how to create an hourly rate. It taught me how many queries I should send a month, and how much I needed to make a day, a week and a month to support myself, including taxes. I also learned what my hourly rate needed to be.

Ask for help.During those nine months, I often felt like I was coming out of my skin. I wasn't earning enough. I was selling old clothes and shoes and books online to make end's meet, and sometimes they still didn't. When an eroneous charge was made to my checking account, I'd call my friend in tears, because I didn't have those extra $10 to spare. But my friend always said the same thing: You will get through this. Focus on November. I know you feel like you're going to be homeless, but you won't. You will make it through.

The outcomeI won't lie: That kind of hard work isn't for the faint of heart. I had to keep doing the low-paying work long enough to keep supporting myself--barely--but also do the additional work of seeking out and doing higher-paying assignments. I was stressed, I was scared and I wasn't convinced it would work. It might have been the hardest I'd ever worked in my life.

But when November rolled around, my income for that month was double what it had been the February before. And it kept coming up. When I'd go to my business meeting with my mentors, I often had a look of incredulity on my face. I couldn't believe it. It worked. I could take a little pressure off. I could maybe go on a vacation and I could trust that my rent would clear and I could be the one to treat my sweetie to a meal for once.

I won't say that it's been an even course. It certainly hasn't. But that focus taught me both that I never want to go back to working the way I used to, and that I had the capacity to work hard and earn a decent income. There's a saying I've heard that goes, "You can act your way into right thinking but you can't think your way into right acting." This experience proved it. I was doing low-paying work because I didn't have the confidence to do more. But by doing the hard work, I earned that confidence.

Wednesday, March 4, 2009

Often, people go into self-employment because they love doing what they do, says Sherrill St. Germain, MBA, CFP®, is founder and principal of New Means Financial Planning, a Hollis, NH-based, fee-only financial planning firm. She provides financial advice on an hourly, consulting basis.

"The thing is, the skills required to be a good writer or a good financial planner are often different than the ones required to run a viable business. Plus, they compete for your time and mindshare."

So how do you put on your business cap if you've never had one? St. Germain, who especially enjoys working with career changers to develop financial plans that enable them to transition to their dream job and the life that goes with it, answers some of finance 101 questions below.

If you haven't done all of them, don't panic. The point of this challenge is to learn and start applying the principles now.

Heather: How is managing finances different for a newly self-employed person than it is for people with full-time jobs?

Further increasing the challenge, this usually has to be done in an environment with fewer economies of scale. So if, by self-employed, we are mostly talking about solo or very small business, that self-employed person will not be as likely to get a good a price as is offered to those buying in quantity, whether the item being purchased is insurance, widgets to be used in a product, or marketing materials.

The plus side:The self-employed have increased control over their financial destinies. In particular, as a full-time employee, you can be laid off at any time, resulting in income going from nice predictable stream to $0 almost overnight. As a self-employed (if you’re doing it right and not relying too much on any one customer), the loss of a single account hurts but you don’t go immediately to $0. Also, working harder/smarter has the potential to have a direct, fairly immediate impact on income, whereas a full-time employee may have to wait until who-knows-when to get a much-deserved raise.

What are the biggest challenges people face, and what should people do to address them before they become a problem?

It all comes down to cash flow, and I think I may have addressed how those challenges arise (probably ad nauseum!) elsewhere.

As far as what to do about it, the answer is to do cash flow projections on a frequent enough basis to catch a shortfall before it starts to cause ripple effects, such as bounced checks that result in angry suppliers no longer willing to provide widgets required for you to deliver product which results in angry customers or maybe former customers. This might be monthly, weekly, or even daily, depending on the kind of business and the size of the cash cushion.

Don’t like keeping a constant eye on the financials? Better have a bigger cushion.

What are the most common financial mistakes made by newly self-employed people?

Not doing nearly enough math to determine whether their plan will generate enough money in the time frame they need it to, in order to support themselves without a lot of angst, financial and otherwise. In my experience, people often want to shift to self-employment so bad, they avoid running the numbers (or they are overly optimistic) so as not to find out things aren’t as rosy as expected and be faced with a difficult decision.

My take: However painful it might be to delay a shift to self-employment to allow for the numbers to work, it’s always less painful than making the leap and finding out later, once thousands of dollars poorer and much more discouraged, that it won’t work. Here are some common gotchas:

Making the shift to self-employment without enough cash to get through the lean beginning period, which can last 3 years or more.

Not knowing how much income from the business would be enough, because you don’t know what you spend now or how it will change after becoming self-employed.

Not keeping business and personal finances separate.

Not keeping enough of a cash cushion in your business account

Confusing sales (money you are paid by a client) with net income (the amount that you actually make AFTER you pay all the costs of doing business). For example, if you have a $15,000 contract but it costs you $12,000 to deliver on that contract, you only end up with $3000 as income. From that, you’ll need to pay a portion in taxes. The rest is yours to do what you like with: take as salary, reinvest in the business, whatever. But don’t plan on $15,000!

Forgetting to set aside money for income taxes that will be due on any money you get paid, and getting an unpleasant surprise the following April.

Not planning for the employer’s portion of payroll tax, a.k.a. the self-employment tax.

Forgetting to save for retirement – No matter how perfect a fit your work, you will someday want or need to retire.

Not getting professional liability, disability, or life insurance (or – God forbid – health insurance) if your family situation calls for it.

What advice do you give to freelancers about managing cashflow? What kind of system do you recommend?

Try to mimic the model of people with full-time jobs. That is, treat the business as a completely separate financial entity. This includes setting up a separate business checking account with enough cushion to allow for expenses to get paid during down, as well as up, periods. This might be something like $3000 – 5000 or more (depending on how big your biggest expenses are and how reliably and frequently new cash flows in.)

I also like the idea of paying yourself a salary, e.g. setting up an auto-transfer of a certain amount of cash each month (or every 2 weeks) to your personal account for use in paying the mortgage, etc. It might not be possible to do this out of the gate, but it’s a great goal, as well as a strategy for insulating your personal finances from fluctuations in the business.

In this credit crunch, do you recommend people use credit cards? Why?I’m a big proponent of “pay it off in full every month” credit card use for both business and personal, because I so rarely see an interest rate that’s reasonable and that sticks around for long enough. In a pinch, if someone can make a clear business case for using a credit card for an expense (i.e. “I’ve done the math, and it’s going to cost me more NOT to buy this big piece of equipment than it will to pay for it + interest on the credit card debt.”), then it might make sense.

How can self-employed people make reasonable budgets for themselves? What do they need to include?

There are two ways to consider this:

PersonalIf you mean personal budgets, I’d recommend they start with an inventory of what they’re currently spending, either by reviewing Quicken data or using my Career Changer’s Cash Flow Worksheet (in Excel). The worksheet has columns for before, during, and after calculations across typical spending categories, including the ones that people often forget because they don’t happen on a predictable monthly schedule, e.g. real estate taxes, vacation, etc. I’d also recommend they include a figure, maybe 5 – 10%, for “unexpected” or “one-time” expenses. Turns out these are never really “one-time” – they’re just different from year to year.

Next, they need to ask the question: “Can I reasonable expect to cover these expenses after a shift to self-employment?” (Again, not forgetting taxes and saving.) If the answer is no, then they need to take a pass through the list of expenses and decide what things they can/want to cut out in favor of opting for self-employment. Best resource for this: Your Money or Your Life, a book that helps readers sort out what’s worth paying for and what isn’t, in alignment with their values and short- and long-term goals.

ProfessionalThe goal for a self-employed person, once the business is established, is to have a budget that is a solid, say, 10% below the average monthly income (after taxes and savings) that can reliably predicted on an ongoing basis. So for example, say you are confident the business will do well enough for you to pay yourself $4000, $1000, $3000, $7000, $1000, $2000 in the first 6 months of the year, for an average monthly income of $3000. A wise self-employed would plan to spend no more that $2700 per month. Then if things go better than expected and there’s a surplus, great problem to have: Buy those things on your “maybe” list, or further beef up your cash reserve. If they don’t go as well, you’re better positioned to survive.

Prior to getting established, you will have to cover expenses with money from other sources besides your self-employed income, whether that’s a spouse’s paycheck, savings, part-time work, or some combination. It’s important to do the math to determine how much will be needed to fill the gap and identifying where it will come from (savings, loan, etc.) before making the leap to self-employment, while you still have a chance to save more to cover shortfalls.

Anything I didn't ask that you want to add?

The number one biggest stumbling block I see with self-employeds is accepting the fact that you’re not just a writer, financial planner, marketing consultant, social worker, whatever, but that you’re running a business and need to put on your business owner hat on a regular basis. Even when you have plenty of business. This means planning time to think about things like:

Business planning – How will I structure my business to make money? How will I monitor and, if necessary, adjust that plan on an ongoing basis before things go awry financially?

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About Career Coaching for Journalists

Heather Boerner is a career and creativity coach for writers who helps freelancers develop businesses that are sustainable, fulfilling and challenging. She does this by gently helping writers focus on what they can control and away from the big fears that block our ability to express our creativity in the world. To inquire about her services, please visit her Web site or contact her at heather @ heatherboerner.com.